Morning, everyone. We can start with, what James has in the bag here. All the secrets of Zions Bancorporation.
This is nuclear codes, Jon.
That's good. Well, thank you guys for being here. Zions Bancorporation. We have Chairman and CEO Harris Simmons, and James Abbott, Senior Vice President and Director of Investor Relations. I was telling Harris on the way up here, we have a lot of generalists, believe it or not, that are interested in this space. I think most of you that are in the financials every day understand what Zions is all about. Maybe Harris, big picture view, describe Zions for us, and then we'll next go into talking about the economy...
Sure.
The company specifically.
Well, Zions Bancorporation is a, you know, a regional bank. We operate from kinda across the Western United States, kind of Houston on the west, and celebrating our 150th year in business this year. We have a an operating model that is very, kinda locally focused. We operate under seven different brand names in local markets. We really try to operate the company like a group of big community banks that are locally managed, locally branded, with a lot of back office kinda consistency in terms of the products, the technology, the risk management, everything kinda behind the scenes that's highly centralized. We do that in part because we have a very major focus on small to mid-sized businesses.
It's a big part of our business, kind of the sweet spot of our business is serving small and mid-sized businesses. We think we do that really exceptionally well. We have about 220,000 business clients that provide us with a really fabulous deposit base and opportunities to provide a lot of different kinds of services to them. That's in a nutshell.
Mm-hmm.
Kind of who we are. About at $85 billion-$90 billion in size.
Perfect. At 1873, you said 150 years.
1873.
I'd like to see, Utah in 1873. That's probably pretty interesting pictures.
Yeah.
Yeah.
Yeah.
Well, you mentioned the deposit base, and we'll get into that as well. Give us kind of an overview of the economy in your... Maybe it differs a little bit regionally, but the message from a lot of your peers has been it's actually surprisingly resilient.
Yeah. It's, you know, we are not seeing, you know, sort of signs of a slowdown in activity. I think, we, you know, fundamental economic activity. We're probably seeing. I think we're starting to see probably some slowing in terms of loan demand.
Mm-hmm.
There's more caution out there. In terms of just the, you know, customers' sales, just the activity, kind of on the street, you're not feeling it at all.
Mm-hmm.
It's one of the reasons I think probably the Fed's got some more work to do.
Okay.
You know, it's... You know, we and we'll see it. I, you know, clearly we're gonna see it in commercial real estate. We're gonna see slowing. It doesn't feel like... I mean, the labor markets are tight enough that, I don't think this is gonna be an ugly kind of scenario ahead of us.
Mm-hmm. Yeah, it feels different.
Yeah.
Yeah, it does feel different. Okay. You've talked about mid-single-digit growth or moderate growth, I believe is the term. Is that right, James?
Mm-hmm.
Yeah. What are the key drivers to that? You talked about a little bit of slowing. Doesn't sound like you're saying massive amounts of slowing. What are the drivers of that growth? Where do you see the opportunities?
You know, it remains it's, it's commercial. It, it's... Some consumer. The consumer side, we're still seeing, you know, actually, pretty good activity, for us, at least in the 1 to 4 family, category. These are jumbo ARMs that we're originating for clients. We're still seeing activity there. Commercial real estate's gonna be, reasonably flat. I, you know, I don't, I don't think probably it doesn't shrink, but I don't think it probably grows this year.
Mm-hmm.
Um-
I'd just add that we've actually got a slide that, and you normally wouldn't see banks, maybe tout the fact that they've been growing very slowly in commercial real estate in the bottom quartile. It's one of the things that we've spent years, really, about over a decade, really trying to keep the growth in commercial real estate very, very, muted. We do have a slide in our slide deck, it's on our website, that shows that we're one of the slower growers in commercial real estate, which actually may prove to be a benefit for us.
Mm-hmm.
Going through a downturn here.
Yeah.
If, depending on how severe the downturn is.
Yeah. Yeah. There was a good article in the Journal two days ago talking about how the recession was always six months out.
Hmm.
It feels like it's six months out. We'll have to see. Have you tightened underwriting in areas and you've talked about maybe being a little bit more cautious in commercial real estate. Anything?
No, not fundamentally. What we've tightened is to focus on concentrations. I mean, where we've been more disciplined, I think, than we've ever been before in terms of how much we will do.
Mm-hmm.
You end up kind of hydrating within that kind of a framework. It hasn't changed the fundamental underwriting guidelines per se. I think we've actually, even going back to the financial crisis, underwriting wasn't the issue so much as it was concentrations for us. I mean, where we took a lot of losses was in, you know, was in land and construction, land development construction, in markets like Clark County, Nevada.
Yeah.
That's fundamentally I mean, it's down to a tiny portion of what we do. Underwriting hasn't been something where we've ever been kind of out on the bleeding edge. One of the things I note is, our charge-offs to average loans have been 75% better than the industry average. Industry over the last 10 years run about 46 basis points. We've run between 11 and 12 basis points. I mean, that's indicative of the fact, both mix, which has changed pretty dramatically from where we were back in 2007, say. The fact that underwriting has never been kind of the issue for us.
Right.
Yeah. We've got a, again, a slide in our presentation materials that looks at over a decade, and then we've got it done it by 15 years as well, if you include the global financial crisis, product type by product type. C&I versus multifamily versus other kinds of commercial real estate versus consumer and so forth. In no category, not one category, are we worse than the industry median-
Mm-hmm.
Peer median, I should say. Most categories we're better, and in some cases we're massively better. In no category have we had worse underwriting, or worse performance than the peer median.
Okay. Consistency is the message. All right. How about pricing? You know, the competitive environment, but also, you know, you guys have some assets that are levered to higher rates. You talked about the Fed maybe having a little bit more work to do. What are you seeing on asset pricing? What are you seeing on the competitive environment? How are the clients reacting to it?
You know, we've been through a period where there's been so much over the past couple of years, this is changing. Over the past couple of years, there's been so much liquidity in the industry that everybody's been looking for earning assets, and it's been, it's, you know, pricing has been very competitive. You know, my sense is that that is probably changing-
Mm-hmm.
As liquidity becomes now topical again. What we're seeing is, you know, the cousin to this is underwriting. I think the industry is remaining pretty, you know, pretty disciplined in terms of... Nobody's been sloppy. We're just not seeing that. We've seen probably some pricing pressure, but not terms, you know, not fundamental underwriting. I think that we're probably approaching a point where pricing starts to get a little firmer.
You're getting the pricing.
Yeah. We're not seeing anything, like I say, I mean, there has been pretty competitive the last couple of years. You know, anecdotally, you're always, you know, you're always hearing bankers complain about the deal they lost. I don't. You know, pricing's okay, and I think probably gets better.
Yeah. Okay. Competition-wise, it's similar, consistent?
Yeah.
Yeah. Okay. Just if you can remind us, and maybe James, for you, just the cadence of the asset repricing on the loan book. What does that look like over time? I think it's, you know, we'll get into funding in a bit, but maybe it's a bit underappreciated, but help us understand the cadence of the loan repricing.
Yeah. A fairly substantial portion of our loan book, net of swaps, will reprice in the first several months of this year.
Mm-hmm.
That's just a continual process, right? These are loans that are tied to short-term indices, have been LIBOR, is moving to SOFR and other sort of indices that are replacing LIBOR. I think from a messaging perspective, one of the concerns that I hear at least is, oh, my gosh, all your loans are gonna be done repricing and deposits are gonna continue to reprice in 2024 and 2025, and that's just gonna create a lot of pain. What we've done is we've presented to investors some materials in our slides that talk about how much of our loan book reprices in 2024. It's about 10%, 12%. Another 10% or 12% reprices in 2025.
There's this ongoing upward, benefit of loans resetting in, future interest, future years.
Mm-hmm.
To offset, hopefully, deposit repricing in those future years. I agree, by the way, that deposits will probably continue to reprice in 2024 and 2025.
Okay. We'll get into... I know you all want to talk about deposit betas, but if any of you have questions at any point in time, feel free to raise your hand as well, and we'll get to them. Just one more thing on loans. PPP, you're very successful with that. The program's faded, but talk about your success in retaining some of those clients and how material was that to Zions in general in terms of longer-term growth profile.
Well, in summary, we did about $10 billion in production, about 77,000 deals.
Mm-hmm.
Way, you know, way above our weight. It was about a quarter of what Bank of America did, for example. They tend to be, you know, we tend to be less than a quarter of their size.
Mm-hmm. Yeah.
Uh.
Roughly.
Roughly. We brought in about 20,000 new customers. 'Cause from the outset we said we're gonna, we're gonna take all comers, you know? We had them. We said, gotta open a deposit account. We're gonna put the proceeds in that account. Then we, you know, really been fighting to try and turn them into customers. For the most part, we've succeeded. I mean, yeah, we clearly lost some. I, you know, I expect that, you know, we'll end up losing a quarter of them, something like that. The rest, you know, the rest are gonna turn into customers. We've had people...
We made over 100,000, 104,000 to be exact, outbound calls last year to clients, these new ones, as well as others, just thanking them for their business.
Mm-hmm.
Talking about how, you know, how can we serve you? We're really trying to use that as a point of look, we've been very inwardly focused for the last few years. A lot of systems work, a lot of process change. We said, "Okay, this is actually an inflection point. We're gonna start really trying to divert all of our energy out toward customers." That's happening, and I think it's paying dividends in terms of developing these new relationships. PPP was a great catalyst for this.
Yeah. Okay. Good. The asset sensitivity and hedging discussion, just to kinda set the table here, just philosophically describe what the goal is, you know, whether or not you feel like you've accomplished what you need to accomplish on that, just to help us understand what you're trying to do.
Yeah. I'll talk philosophy and James can talk into the numbers. Philosophically, what we're, you know, we have a naturally asset sensitive balance sheet, and that's kind of just this small mid-sized business focus. We're naturally asset sensitive. We hedge to try to reduce that sensitivity. We're doing a lot less hedging when interest rates are at zero. As rates move up, we're doing more and you'll never, you know, nail it exactly. The idea is that as there becomes more downside risk as, you know, the rates coming down, that we wanna be less exposed.
We're still somewhat asset sensitive, and I think, have felt that, yeah, that the Fed probably still has another year plus work to do. We've been putting on more hedges as we've had some deposit runoff. That's also reduced the asset sensitivity. It's a combination of hedges and looking at what's happening in the deposit book. We're trying to manage this to a point where we're probably slightly asset sensitive, would be our kind of natural stance.
Mm-hmm.
We're much less so today than we were two years ago.
Yeah. It's challenging.
Yeah.
A quarter of it is making cuts.
Yeah. I mean, you can talk about deposit betas all day long. You know, what are they gonna be? There's so much optionality on both sides of a bank's balance sheet that this is, you know, there's a lot of speculative, just kind of estimation that takes place in all of this in terms of how customers will behave. You know, we model it out. We talk about what we think it's gonna look like. The one sure thing I know for sure is that's not gonna be how it actually plays out, but we hope to get pretty close to that. Philosophically, that's kind of where we try to position ourselves.
I think, Jon, what I would add to it is that we did a little bit of a data, kind of a type of analysis of trying to figure out when the Fed is above 3%. At some point, the depositors stop caring as much about what they're getting paid on their deposits. Certainly at zero, people are indifferent, whether it's non-interest-bearing checking account or an interest-bearing account. Above 3%, we said, let's just use that as a hypothetical level that customers might care.
Mm-hmm.
What is.
When did you look at this, by the way?
We probably first started publishing this three-six months ago.
Okay.
We just started saying, well, you know, what's our competitive advantage in a higher interest rate environment? 'Cause one of the concerns is, that we hear from investors anyway is, oh my gosh, you've got 50% non-interest-bearing deposits. you know, is the sky gonna fall? Is the margin gonna completely collapse if the demand deposits drain and move into interest-bearing deposits? One of the ways that we've approached that is say, well, go look at our margin in 2007. 25% of our deposits were in checking accounts, 75% were in interest-bearing accounts, and the margin was over 4%.
Mm-hmm.
Comfortably over four. A lot higher than where it is today. We said, look at the funding cost of both total funding cost, which includes borrowings, or just look at deposits. Either approach will give you about a 40 basis point cost of funding advantage for Zions relative to our peer group.
Mm-hmm
... when the Fed is over 3%.
Mm-hmm.
40 basis points, when 80% of your revenue is spread income, that's actually a quite significant effect on the ROA.
Mm-hmm. Okay.
What, what's different, I guess, today than what you were thinking about three months ago in terms of the views on, you know, your margin management and your rate management? Is this higher potential for higher rates and no cuts, does that impact how you're thinking about this and how you're
I don't think really. We've known that because this is a matter of elasticity, and I just kind of, you know, to James' point, at what point do people start to say, "I'm gonna move money." We've known that in the early innings that, you know, things were gonna be reasonably elastic, and as you get into the later innings, less so. You know, we expect, we fully expect that this wasn't gonna be linear. It's gonna pick up and then level off.
I think the thing that is easy to forget that, yeah, you'll have a lot of deposit repricing, but the you also have a lot of deposits that won't reprice, and the value of those becomes much greater.
Mm-hmm.
-in a higher rate environment. There's that offset. You know, we spend a lot of energy trying to model all of this.
Mm-hmm.
Net, net, you know, we think we remain somewhat asset sensitive. Like I said, not as much as we were a couple of years ago, but, don't expect that we're gonna be in a position where it's gonna be, you know, be painful.
Yeah.
I, you know, I'm not concerned about seeing the Fed pick things up a little bit. That shouldn't be. You know, what we don't wanna see is rate hikes that start to really do damage in the real economy.
Right.
You know, everybody wants to see things slow and get kind of back into equilibrium. It's not a concern so much about how it affects our rate sensitivity is so much in my mind as how it, how it affects just the real economy.
Mm-hmm.
So.
You know, I know a lot of the faces in this room, and there are a lot of fans, and I think that the consensus is your deposit betas will be lower than a lot of your peers. James, you kind of alluded to the pricing advantage that you have. It, it sounds to me like higher rates don't really bother you. You don't feel like you need to alter what you're telling us in terms of the outlook. Is that fair?
That's how I feel about it.
Mm-hmm.
I agree.
Okay.
Yeah.
Any follow-ups on betas? Okay. Good. You kind of alluded to it, Harris, the curve inversion. You didn't allude to the curve inversion, but I think we think about the curve inversion of the Fed going higher and impacting credit, just on the margin. Curve inversion, longer term impacts on the industry and on your company as well. Does it bother you that we're 100 basis points inverted?
No, not particularly. I think, Look, I mean, yield curve is a cumulative set of bets on what the Fed's gonna be doing over the next few years and, you know, how, you know, how the economy responds. I don't think it's I mean, the first thing I say, I think about this a lot. It's like I went back and looked recently at the average effective Fed funds rate over the course of my lifetime. It was like 4.63%.
Mm-hmm.
you know, everybody's freaking out today. It's actually, you know, I mean, this is normal, folks. you know, unless you're, you know, if you're kind of a Gen Z type and never seen this before. I mean, you know, we don't, you know, we don't want to see 1981 again. you know, we've had these highs, these lows. I, you know, I actually think that the world would be a pretty good place if this was kind of a new normal.
Mm-hmm.
'Cause I don't think that rates today are at levels that are doing a lot of damage in the economy. I think it's a great, it's a great environment for banks.
It's been interesting, hasn't it? Yeah.
I mean, it's just weird to me that, across the whole industry, the valuations are at a 40-year low relative to the S&P, and we're actually back into a rate environment where we can all make money.
Sure.
where nobody's really direly concerned about credit.
Yeah.
It's just a strange time.
Are anything bothering you on credit or anything you worry about?
No. I mean, hey, listen, I think we all worry about particularly about office and commercial real estate, and how that's going to play out. We have very little in the way of kind of sort of downtown high-rise kind of exposure, which I think is probably gonna be where the greatest potential for pain is. That's going to play out as leases roll and everybody's kind of rearranging space, et cetera. I mean, that's the one thing that I think we kinda get, you know, that we are concerned about. Our total office exposure is about $2 billion.
Mm-hmm.
You know, so far we're not seeing, you know, we are not seeing stress in it, but we know that that's probably a storm that's still out there.
I would guess your style is A lot of downtown office.
Yeah. I say it's almost no downtown office exposure.
Okay. A little bit on capital and buyback. You've had a small buyback. James, I was out with you and Scott in December and we it's kind of this AOCI buyback Gordian knot or conundrum, whatever you wanna call it. What's the philosophy today on capital? How do you think about the AOCI marks? Because I think they'll you know, call it rear their ugly head again, like they did two quarters ago this time.
Maybe I'll just kick it off with the concept of we moved about half of the securities portfolio into held-to-maturity with the design behind it was to protect against higher interest rates if they were to happen. Of course.
Your 10-year yield came down.
We lacked a little bit. We said that as soon as we do this, we'll know that we've top ticked the market and the yields will come down.
You did, and now you're back.
They did.
Yeah.
Now, after yesterday, I'm actually really glad that we did what we did. But we moved about 2/3, or close to 70% of the risk of AOCI exposure into that held-to-maturity bucket. Even though we only moved about half the securities portfolio, we moved the longer duration portion of the securities portfolio, if that's helpful.
Mm-hmm.
We did protect ourselves against something like what we were seeing at the moment.
Mm-hmm.
I've just finished writing a shareholder letter, and I write about this, spoiler alert. I mean, 'Cause I talk around our company about, you know, GAAP accounting in banking is I liken it to a Picasso painting.
Mm-hmm.
Where you've got, you know, one ear that's kind of this size and the other is this, you know. So there's... You can kind of see in this abstraction a face, but it's not the symmetrical face that Andrew was looking at. The fact of the matter is, I mean, what's weird is, you got this distinction between accounting and available for sale, held-to-maturity , how it hits capital, you know, GAAP capital at least. It doesn't but nowhere is there any reflection of what it's doing to the value of your core deposits.
Mm-hmm.
I mean, which is, which is actually expanding margins, delivering more, actually cash to investors. So it's one of those things I think you have to kinda look through. I'd be looking at, first of all, you have to look at the marks in held-to-maturity as well as available for sale to make sense of anything. Then you have to ask what, you know, and let's talk about the liability side and how is the interest rate environment impacting the value of liabilities.
Mm-hmm.
When you do all of that, I think again, you come back to the conclusion I do, that this is actually a fabulous time in banking.
Mm-hmm.
It's not reflected in AOCI and all, you know, it's kind of the GAAP accounting. You have to kind of work through that. You also have to recognize that it's one of those things that some people will talk about. You know, you have to kind of pay attention to it, but it shouldn't logically be kind of what drives you. Our real focus is on CET1.
Mm-hmm.
We think that with the possibility of recession, we'd like to see that number up closer to 10 or 10, maybe a little over 10. I think that will happen very naturally here over the next couple of quarters, as income remains pretty robust and loan demand probably slows a little bit.
Mm-hmm.
You know, I think, you know, I think we're probably back in a position where we can, like to hope that we could accelerate some buybacks.
Okay. Okay. Clearly, no issue with your regulatory agencies because you've been doing it, right? They're not paying attention as much to AOCI either.
I mean, I think they're looking at. I think they look at it because they think all of you are looking at it.
Yeah.
We all, you know, you have to be kind of mindful of it.
Yeah.
I think anybody looking at this intelligently, I mean, you get a lot of people who probably don't understand what I'm, what I've just talked about.
Yeah.
If you think about the economics of what's actually happening in banking, I don't think there's any concern, any reason to be concerned about our capital or a dozen other large banks, who are south of where we are.
Yeah.
In terms of the GAAP number.
Okay.
Yeah.
Okay. Well, in summary, moderating loan growth, but still decent activity and coming off of a strong year. No real concerns on credit. Maybe an acceleration of the buyback at some point. Getting to the bottom of the margin and deposit betas, I'd probably give myself a C plus, B minus to getting to the bottom of it. I think you're basically saying, it may pick up, but it's nothing that you're alarmed about and you still see an advantage relative to peers, but you're not signaling any kind of change in what you're thinking on deposit betas. Is that all fair?
I think at the end of the day, if you look at a bank and say what kind of, you get out of the kind of the mathematical mindset and say, let's talk about what kind of franchise they have.
Mm-hmm.
How are they funding themselves? Do they have, you know, if you take securities less borrowings, I mean, do they have a liquidity? You know, are they up against the wall or is this a franchise that has a lot of core deposit funding? I think that's going to be a more prominent theme, and I think we're in pretty good shape there.
Yeah. Okay.
Yeah.
Good. Well, thank you for being here, guys. I really appreciate it.
Thank you.
Thank you.
Good luck today with the conversations.
Thank you.